The Palestinian Economy post Oslo: Unsustainable Development

Economic development in post-Oslo Palestine has been constrained by a number of factors. The absence of a political settlement of the Palestinian-Israeli conflict and a sound regulatory environment has discouraged private investment flows. Yet perhaps most significantly, the Oslo framework and the Clinton administration’s political strategy placed temporary stability and Israeli security concerns above Palestinian independence and sustainable economic growth. Given the constraints laid out in the Declaration of Principles (DOP), it was unrealistic to expect the Palestinian economy to make substantial progress in achieving a reasonable measure of independence, particularly since Israel retained control over external borders as well as the entrances and exits to Palestinian autonomous enclaves.

Economic Performance:

From January 1994 to September 2000, Palestinian Gross Domestic Product (GDP) expanded from $3.65 billion to a projected $5.3 billion. With high population growth, however, real GNP per capita income rates witnessed marginal improvement: From $1,739 per capita for the West Bank and $1,162 for the Gaza Strip in 1994, average incomes rose to a mere $1,900 by September 2000, with positive gains realized only since 1998. Unemployment decreased from 18.2 percent in September 1995 to 11 percent by September 2000, yet the majority of these new jobs were either in Israel or the Palestinian public sector. Real wages did not register a significant increase; instead, they fluctuated immensely. By September 2000, poverty rates were only reduced from 24 to 21 percent. These rates reveal a failure to address the key causes of poverty, including an insufficient number of high-value jobs to meet the needs of a growing population.

The disappointing performance of the Palestinian economy stems from several factors. Export-led growth, which is widely accepted as Palestine’s best strategy for economic development, has not significantly materialized. By mid-2000, 75 percent of Palestinian imports still originated in Israel, with 95 percent of exports destined for the Israeli market. Palestine has been unable to establish a robust industrial sector to provide high-value jobs and progress toward economic independence.

Private Investment Discouraged:

The Paris Protocol of 1994, which governs economic relations between Israel and the Palestinian Authority (PA) for the interim period, provides the PA with a great deal of autonomy in establishing institutions and defining import policies. The World Bank reports that through the support of the international donor community, the PA has achieved respectable levels of service delivery and fiscal administration comparable with other developing countries of similar size. Still, establishing a sound regulatory environment for investment and transparent institutions remains a challenge. Public sector corruption as well as the executive branch’s unwillingness to protect private investments through the establishment of an independent judiciary has discouraged private sector investment. Additionally, as long as the PA does not have sovereignty over a contiguous area of territory, Palestine will be unable to attract substantial private sector investment.

Unsustainable Development and Closure:

Following the signing of the DOP, the Clinton administration called on the international community to provide financial backing to ensure support for the nascent PA and the Oslo peace process. It was hoped that improved living standards for Palestinians would provide political stability for the PA until a permanent resolution of the conflict could be achieved. Eight years and $3.5 billion later, the inherent flaws of this strategy are apparent. Rather than engendering sustained growth and peace, foreign aid has distorted the development process and created potentially irreparable cleavages in Palestinian society.

Israel’s power to impose closures on the Occupied Territories reveals the virtual impossibility of devising a viable development strategy in the context of Oslo. Israel’s closure policy, by curtailing the movement of labor and goods, has had a devastating effect on the entire structure of the Palestinian economy. Periods of severe closure, such as in 1995 and 1996 and during the current intifada, have resulted in crippling losses. In comparison, the relative infrequency of such closures from early 1998 to mid-2000 enabled the economy to recover from previous losses. During comprehensive closures, emergency job creation programs have been enacted to ensure political stability for the PA. A United Nations Special Coordinator Office (UNSCO) report on the Occupied Territories reveals a loss of 18.81 percent of potential workdays from October through late January 2001. For October and November 2000 alone, the closure affected a 50.7 percent loss in GDP. The poverty rate in Gaza has risen above 40 percent, while unemployment has surpassed 45 percent for the West Bank and Gaza combined.

Although relative stability has been maintained for most of the post-Oslo period, the steps taken to ensure the status quo have entailed sizable risk to the long-term viability of the Palestinian economy. Key indicators reveal that while unemployment rates fell between 1994 and mid-2000, the solutions were temporary fixes of the problem of job creation. Between 1995 and 1999, more than 131,000 jobs were created for the Palestinian market, with Israeli construction jobs representing more than a third of net job creation. The PA employs more than 15 percent of the labor force. During the current crisis, rather than pressuring Israel to stop its use of collective punishment, the international community has chosen to ensure short-term measures once again through emergency job creation programs and funding to pay the salaries of the PA’s bloated bureaucracy. The World Bank allocated $12 million for emergency employment in late 2000; the European Union donated $25 million to the PA in November and advanced $91 million from its 2001 budget. At the Arab Summit in March, Arab countries pledged a total of $180 million to the PA to help it meet its budgetary needs. In late June, the United Nations Relief and Works Agency issued an emergency appeal for $77 million, a large proportion of which will be allocated to the creation of 700,000 emergency job opportunity days for the unemployed.The recent uprising, however, has demonstrated that Palestinian society will not accept short-term improvement in their living situation at the expense of political and economic independence.

An Independent Economy:

Israel’s restrictions on Palestinian trade threaten to undermine long-term growth. To achieve sustainable growth, Palestine must have free access to markets and control over its monetary policy. This does not necessitate the breaking of all linkages with the Israeli economy-indeed, Israel may be Palestine’s most natural trading partner-but the terms of trade must be equal. Palestine’s economy is extremely vulnerable to exogenous shocks such as closure. Due to the constraints of Oslo, Palestinians have made little progress toward the establishment of an independent national economy. Although economic conditions have not worsened continuously, the volatility engendered by Israeli closures and political uncertainty have stymied growth and perpetuated poverty. Despite some gains in institution-building, the PA has failed to make substantial progress toward a transparent legal framework that may serve as the basis for attracting private investment. Development aid has provided important advances in the infrastructure of the territories, but it has failed to provide a firm basis for sustainable development.

In the short term, the Bush administration and the international community must formulate a strategy aimed at moving toward economic independence for Palestine. The first steps that should be taken, perhaps as part of the package of confidence-building measures outlined by the Mitchell Commission, should include: (1) a reformation of Israel-PA economic relations, (2) a mechanism to ensure access to external markets and freedom of internal movement between areas of PA control, and (3) the curtailment of Israel’s comprehensive closure policy as a security instrument.

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